BRUSSELS, Sept 17 (Reuters) - The European Union agreed on
Tuesday to lift sanctions on a Zimbabwean diamond-mining firm
despite concerns over alleged fraud in a July election that kept
President Robert Mugabe in power.

The decision gives a boost to Mugabe, whose ZANU-PF party
calls EU sanctions illegal, and will allow the mining firm to
sell its diamonds in Europe, potentially raising its revenues.

Belgium, centre of the global diamond trade, had pushed hard
for the EU to lift sanctions on ZMDC, in line with an earlier
agreement. Britain, Zimbabwe's former colonial power, resisted
the step so as not to be seen to be rewarding Mugabe.

The EU had targeted ZMDC with an asset freeze, alleging it
was "associated with the ZANU-PF faction of government".

The decision to remove ZMDC from the sanctions list must be
endorsed by EU ministers. That is expected to be a formality and
to happen quickly, an EU diplomat said.

Mugabe overwhelmingly won the July 31 vote but his main
rival, Morgan Tsvangirai, denounced it as a "huge fraud". The EU
expressed serious concerns over alleged irregularities.

ZMDC operates five joint-venture mines in the rich Marange
diamond fields, producing eight million carats last year and
generating $685 million in exports, the state-owned Herald
newspaper reported earlier this year.

Anti-corruption watchdog Global Witness, citing links
between mining companies, insiders in Mugabe's ZANU-PF party and
Zimbabwe's pro-Mugabe military, has alleged that state diamond
revenues may have been directly spent on securing Mugabe's
re-election through intimidation of voters and vote-rigging.

The EU suspended most sanctions on Zimbabwe in March to
encourage free elections. However, sanctions on Mugabe and nine
others remain in place.

ZANU-PF spokesman Rugare Gumbo said lifting the sanctions on
ZMDC was "too late and too little".

"They want to help their commercial enterprises, the
diamond-cutting companies (in Belgium). That's the reason. They
do not care about the suffering people of Zimbabwe," he said.

EU diplomats concluded there was no indication that ZMDC's
activities were linked to violence during the election period,
Mann said.

But he said the EU remained very concerned about the issues
highlighted by election observers which raised "serious
questions about the fairness and credibility of the process".

A British diplomat said London had made clear to its EU
partners that remaining sanctions on Zimbabwe were justified.

"In the months ahead we'll keep working with our partners to
ensure that the EU maintains a robust approach," he said.
(Additional reporting by Justyna Pawlak in Brussels, William
James in London and MacDonald Dzirutwe in Harare; Editing by
Paul Taylor)